Walgreens Hit With Private Equity Taint?

Walgreen Co’s respectable ‘A+’ corporate credit rating may be in danger thanks to private equity. Yesterday the drugstore chain agreed to buy Duane Reade from buyout firm Oak Hill Partners, earning the buyout firm a 1.5x return. As a result of the deal, Walgreen will take on $457 million of Duane Reade’s debt and operating leases.

That caused Standard & Poor’s to place the Walgreens’ corporate credit rating on CreditWatch with negative implications. The change reflects S&P’s belief that the deal will bring weaker-than-expected earnings and no improvement in the company’s credit metrics. S&P is also concerned with Walgreens’ limited track record in integrated large acquisitions and aggressive financial policy.

S&P said any ratings downgrade as a result of the deal won’t exceed one notch, meaning the worst rating Walgreens can really get as a result of Duane Reade is a medium-grade ‘A’ rating.

But, there’s a silver lining! Duane Reade, which watched its operating performance deteriorate as a public company since 2001, will be free from the debt that landed it on on S&P’s “Weakest Links.” The company managed to hop off the list in 2008 and even improved its debt ratings under Oak Hill’s ownership, after a refinancing and fresh equity injection. Now with Walgreens set to absorb its debts, the company may get a nice little upgrade. S&P today placed ratings on Duane Reade’s debt on CreditWatch with positive implications. Currently the company has a highly speculative grade “B-“ corporate credit rating.